Capitalist Development and Economism in East Asia

The Rise of Hong Kong, Singapore, Taiwan and South Korea

Kui-Wai Li

• Publisher: Routledge
• Year: 2003
• Print ISBN:
  9780415268738
• eBook ISBN:
  9781134492695
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

Taking a conceptual approach, this book studies the economic development of the four East Asian economies since 1950. The author summarizes and reconsiders many of the arguments and findings that supported and explained the economic 'miracles' of Hong Kong, Singapore, Taiwan and South Korea, analysing the relationship between economic development, growth and political economy. This pioneering book will stimulate further analysis of East Asian development. It will be of essential interest to scholars in East Asian economics, and all those interested in modern economic development.

1 Economism and Development

1.1 The Paradigm of Economism

The post-World War II economic development of the four East Asian economies of the Hong Kong Special Administrative Region (Hong Kong), Chinese Taipei (Taiwan), Singapore, and South Korea has shown a distinctive pattern. A superficial review of these four East Asian economies reveals that they are not too different from others nearby in terms of their shortage of natural resources and ready availability of other resources, e.g. labor. Their economies are not particularly strong, but, on the other hand, military expenditure is low. However, at the end of World War II, the economy of the Philippines was considered to have more potential for growth than that of its neighbors in Asia.

The economic success of the four East Asian economies has been documented in a great volume of literature. The culture heritage of Confucianism could be a historical convenience, while the stages of growth and capital accumulation theories are the conventional approaches. The economics of laissez-faire, together with foreign trade and investment, have constituted another area of study. The “flying geese” model of development looks at growth from a regional perspective. Studies of industrialization and changes in industrial structure tend to focus on the internal dynamics, while human capital and technology advancement are advocated by the endogenous growth theory. The change in East Asia’s growth experience and its geopolitical position have also been examined.

A major failing of all these studies is that they do not provide a cohesive and comprehensive conceptual framework that goes beyond analysis based on individual subject disciplines and areas. At the conceptual level, these studies lack a comprehensive framework that examines the economic growth experience of these four economies in their entirety. The growth experience of the four East Asian economies represents a new paradigm that may not have parallels in other countries – a paradigm that requires specific conceptual interpretations, demands new ways of translating existing economic principles, and projects a growth pattern that can be exported to other economies.

The paradigm of economism attempts to provide a conceptual framework that links together and reinterprets a number of independent macroeconomic developmental issues. Economism emphasizes the importance of using economic tools and means in arriving at a solution acceptable to society. Economic consideration has constantly been given top priority, as it often produces positive-sum, Pareto-optimal, or “win–win” solutions and absolute benefits, though the extent of the benefit varies among individuals. In a nutshell, the development experience of the four East Asian growth economies shows that economic growth takes paramount priority over wealth redistribution and other non-economic considerations. For example, in the pursuit of growth, poverty reduction is considered a good investment, but reduction in income equality may vary depending on income growth. However, another common concern among these four economies is political stability.

The economism paradigm consists of five basic economic conceptual elements that govern the successful operation of an economy. These five elements are the focus on poverty reduction rather than pursuit of equality; the role of government as a provider of “economic fertilizers”; the emphasis on domestic strength with changes in comparative advantages; a pro-growth political regime; and the presence of a market economy. Together, these economic concepts form the very fundamentals, or “floor conditions”, upon which economic activities are conducted successfully. These “floor conditions” guarantee the different economic minima in the society. How much each individual or business prospers and achieves more than the minima depends on the initiative of individuals, the availability of economic opportunities, and on market disciplines and interactions. Economic cycles are periodic changes in income that arise as a result of fluctuations in investment and income activities.

The first conceptual element is the preference for absolute poverty reduction over the attainment of relative economic equality. A graph of income inequality over time in the four East Asian economies discussed here would take the form of a U-shaped curve over recent decades, that is, income inequality has fallen, leveled out, and then risen again. While poverty reduction has been achieved through the exercise of various effective internal and external policies, income inequality has, by and large, been tolerated. Internal policies such as development in infrastructure, education, employment, and training have ensured economic security. External policies have included the pursuit of an open and export-oriented economy. Foreign direct investments have supplemented domestic capital, facilitated industrialization, and ensured exports. Poverty reduction is a long-lasting phenomenon. However, population movements, for example, could lead to the re-emergence of poverty, helped along by the fact that the so-called poverty line is raised periodically.

Expansion in business and employment opportunities ensures economic security, which, in turn, guarantees social security. The provision of jobs as income grows secures the ability of individuals to look after their economic well-being. The greater the extent to which individuals are able to take care of their own economic and social well-being, the less is the need for assistance from the state or the government. The lower requirement for government expenditure on social welfare, in turn, reduces the need to impose a higher tax burden. A lower tax rate further stimulates businesses and encourages individuals to pursue their own economic self-interest. The more people work, the larger the tax pie and the greater the opportunity for the government to lower the tax rates. A lower tax rate stimulates business, and, in turn, results in higher taxable earnings for the government. Economism argues that income inequality is inevitable, as it reflects individual differences in resource endowment. An absolute increase in income through expansion in economic opportunities is a more important socio-economic goal than relative income equality.

According to the second conceptual element, government maintains a suitable business environment through the exercise of appropriate fiscal incentives, infrastructure provision, education, and training. A minimum level of provision in such welfare-related items as health and public housing ensures that the workers’ “survival cost” is minimized. The fiscal framework is biased toward the supply side of the economy, and government expenditures are geared primarily to the generation of income, employment, or skills. Thus, government serves two primary roles: welfare and infrastructure provision and promotion of wealth-generating activities. Government intervenes mainly through the exercise of instruments and incentives that provide “economic fertilizers” to businesses and households. This is the second conceptual element of the economism paradigm.

It has been argued that the open and export-led nature of the four East Asian economies led to economic growth. It is true that these four economies benefited from the buoyant external sector but, given the high mobility and competitive nature of foreign capital and investment, it must have been the strength of the domestic economy that attracted foreign capital. The strength of the domestic economy depends on, among other things, the rate of income growth and such factors as stability and an efficient institutional framework.

Domestic strength is the third conceptual element of the economism paradigm. Economism advocates an open-door, market-friendly economic policy and strategy that results in the international community both complementing and supplementing the domestic economy. Comparative advantage still forms the basis of trade, but economies are focused on economic flexibility and the changing or dynamic nature of the comparative advantage. Domestic economic advantages change in response to the needs of the international community. Thus, it would be more appropriate to argue that foreign investment and exports are the consequences of a successful domestic development strategy. However, foreign investment and exports constitute necessary but not sufficient conditions for economic success, a strong, growth-conscious domestic economy also being required.

Despite the lack of a freely elected political regime, the governments of the four East Asian economies have permitted a great degree of economic freedom at both the macro and micro levels. Economic growth has overridden all other political objectives. Resource allocation and economic policies have been pro-growth, which fits in with the fourth conceptual element of economism: political stability. Political stability has contributed to positive investment activities. The increase in the number of wealth-holders, coupled with improvements in education, has meant that, as people become better educated and better off, they are in a better position to appraise and influence government policies. Responsible and effective governments have produced a consistent policy and investment environment. Economic freedom has been granted to individuals to conduct all forms of legitimate economic and financial transactions. Strikes, civil unrest, union activities, and open conflicts have been minimized and are regarded as disruptive to economic growth. A period of stability lasting a number of decades has enabled economic resources to gain efficiency. Improvements in human capital, gains in capital efficiency, and advancements in technology have enriched productivity. In short, economism believes that the economic engine sets its own pace, and economic results require the exercise of appropriate, consistent, and decade-long policies.

The fifth conceptual element is the capitalistic, market-oriented nature of these four economies. Competition provides market information to both suppliers and consumers. This ensures fair play and equal opportunities for individual market participants. The absolute gains so derived through competitive market disciplines may lead to relative differences in gains, but such differences are accepted as a reflection more of differences in individual endowment than of inequalities in the allocation or distribution process. Like capitalism, economism also advocates private ownership, intellectual property rights, a free market and the “invisible” hand, the dominance of the private sector, and a low level of government involvement in the economy.

These five elements form the “economism” paradigm in the four East Asian economies. The focus on poverty reduction rather than income inequality has cleared the way for absolute income to increase. The rise in absolute income has generated growth in a market economy in which different capitalistic elements have enabled individuals to maximize economic gains. With the pursuance of absolute income, economism is a game of “more” or “less.” The “more” and the “less” survive in harmony and their “conflict” is exercised through the various forms of economic activities. No economy can do away with its governing body but, in this case, the presence of the government has assisted individuals by providing economic incentives and other growth-promoting activities. Government activities have encouraged further increase in absolute income for individuals. Similarly, no economy can shut itself away from the outside world, but the focus should be on the strength of the domestic economy in attracting trade and investment. Stability and competitiveness are important domestic factors. Careless political regimes can damage economic growth. However, in the case of these four economies, a pro-growth political regime has ensured the separation of the economic game and the political game.

The economism paradigm concentrates on the combinations and outcomes of these five inter-related conceptual elements as they are applied consistently over a long period of time. Economism encourages and pursues virtuous circles. One relates to the reduction in poverty, a low tax regime, and a growing income pie that allows individuals to rely more on their own achievements and less on government assistance. The reduction in government expenditure means that more government resources can be devoted to “wealth-generating” activities. Another virtuous circle is initiated by a degree of economic openness, which invites foreign participation, which, in turn, supplements domestic shortage in terms of exports and capital. The third virtuous circle can be realized from sustained growth and the expansion of the real economy through expansion in exports, manufactures, and investment and infrastructure construction. An enlargement of the real economy gives rise to activities in the financial economy and services in the tertiary sector.

This chapter discusses the various conceptual elements of the economism paradigm. Section 1.2 outlines a simple economic theory of growth. Sections 1.3 and 1.4, respectively, relate the issue of absolute income versus relative income comparison and the importance of economic security. Section 1.5 talks about the role of government, giving special attention to tax as a government instrument, while section 1.6 examines the political and international setting that helps to promote growth. Section 1.7 then outlines the structure of following chapters.

1.2 The Economic Pie and its Distribution

The first lesson in economics is that human wants are insatiable and individuals are economic maximizers. However, society has limited resources and opportunity cost is involved. Decisions have to be made on choice, priority and distribution between all economic outcomes. If more economic resource is devoted to one outcome, less will be available for others. The fundamental objective of economic growth is to create income and wealth for society. The economic pie of income and wealth can be enlarged by expansion in investment activities. There is also the impact of the economic multiplier, whereby one area of economic improvement spills over to another. A virtuous circle will then be generated in which an increase in income in one sector encourages the same effect in other sectors.

There are three types of economic resources, or factors of production, that can be utilized to improve the income of society. These are natural resources (agriculture, minerals, land, and all other forms of natural endowments), human resources, and capital resources. Studies have concentrated on the availability of these production factors. Equally important, however, is their mobility. Natural resources are the least mobile. Land, forest, and minerals cannot be moved from one place to another, and they may not be useful to human beings when they are in their raw form. The process of “value-added” through investment activities turns natural resources into commodities. Human resources are slightly more mobile, as people can move to work in different areas and professions. But human beings are not born to be professionals and experts in certain areas. To turn human beings into human capital, investment is needed to increase the “value-added” content of human resources. Education and training take time, and financial capital has to be made available to set up schools, colleges, universities, and other training institutions. Human mobility is therefore constrained by geographical and professional limitations.

Capital resources are the most mobile, mainly because of their high liquid status. Financial capital, in the form of stocks and shares, bonds, and other forms of securities, can be transferred easily to different geographical areas and currency denominations, depending on the utility preference of its owner, the rate of return, and the regulatory framework governing the movements and liquidation of assets. Financial capital mobilizes other resources. Natural resources become “consumables” only when capital is injected into the value-added production process. Financial capital is the most powerful of all three economic resources. Through the investment process, when financial capital is mixed with natural resources and human resources, economic output, in its broadest sense, is generated, giving rise to consumption, employment, and income generation that will ultimately lead to an increase in economic well-being.

The three types of economic resources are located in the upper portion of the funnel in Figure 1.1. Natural resources, the least mobile form, are situated at the top of the funnel, followed by human resources. Financial capital, the most mobile form, mobilizes the other two forms of economic resources. The circuit, indicated by the arrow in the upper portion of the funnel, suggests that both natural and human resources have to be transformed by financial capital before they can be utilized.

Figure 1.1 The Investment funnel

The lower portion of the funnel shows the chain relationship created by the investment of financial capital. The outcome of investment activity is the generation of output, income, and household consumption. Output influences both income and consumption, which eventually determine the economic well-being of society. The arrow in the lower portion of the funnel shows the circuit in which the increase in economic well-being then requires a further increase in output. The size of the economic pie is the amount of output produced at any given time. This depends on the quantity and efficiency of financial capital.

The crucial link in the funnel is the cross between financial capital and output. At the macroeconomic level, the “quantity school” argues that the higher the level of investment, the higher the level of output. Important factors are the different types of investment (direct or portfolio investments) and the source of investment (bank loans, shares, or corporate bonds). On the other hand, advocates of the “quality school” are concerned with the effectiveness of financial capital and the operations of financial institutions and financial instruments as veh...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• Preface
• 1. Economism and development
• 2. The expansion of the East Asian economic pie
• 3. Growth, inequality, and the survival cost
• 4. Economic fertilizer and the government
• 5. The external dimension: a necessary condition
• 6. The law of first opportunity in economic growth
• 7. Economism and political regimes
• 8. The Asian financial crisis
• 9. A challenge to economism: Hong Kong’s sovereignty reversion
• 10. Asia is no miracle
• Notes
• Bibliography
• Index